April 16, 2025
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek correction of the individual income tax assessments issued to your clients ***** (the “Taxpayers”), for the taxable years ended December 31, 2020, through 2022.
FACTS
The Taxpayers filed Virginia resident income tax returns for the taxable years at issue, claiming charitable contributions as itemized deductions reportable on federal Schedule A. Under audit, the Department requested substantiation for the noncash contributions. The Taxpayers submitted some documentation, but the auditor determined it was insufficient to support the claimed deductions and issued assessments.
The Taxpayers submitted an application for correction, contending they provided sufficient documentation. Alternatively, the Taxpayers assert that the Department should allow a reduced deduction of $5,000 for donations they valued at more than $5,000 but did not obtain the required qualified appraisal. At a minimum, the Taxpayers argue that they should be able to claim a $500 deduction for any donation if the substantiation provided failed to meet the requirements of the higher tiers.
DETERMINATION
Conformity
Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. For individual income tax purposes, Virginia conforms to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Chapter 3 of Title 58.1 of the Code of Virginia.
Generally, the Department relies on the accuracy of information and computations reflected on the federal income tax return when reviewing Virginia individual income tax returns. If the information provided on the federal return looks reasonable, there is generally no reason to look behind those computations. The Department, however, retains the authority to adjust the FAGI and itemized deductions where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. See Virginia Code § 58.1-219.
Itemized Deductions
Virginia Code § 58.1-322.03 1 allows an individual to deduct from their Virginia adjusted gross income certain amounts allowed for itemized deductions for federal income tax purposes. These deductions include those for real estate taxes, home mortgage interest, personal property taxes, medical expenses, and charitable contributions, provided they are claimed in accordance with the IRC and its related regulations.
The Department requested that the Taxpayers provide documentation supporting the noncash charitable contribution deductions claimed on their Schedules A for the 2020 through 2022 taxable years. The request clearly indicated the documentation required to substantiate the deductions. Deductions for charitable contributions are allowable only when they can be substantiated through items such as receipts or cancelled checks. See Public Document (P.D.) 14-155 (8/28/2014) and P.D. 19-78 (7/29/2019). In addition, any contribution over $250 must also have a contemporaneous written acknowledgment from the donee indicating whether any goods or services were provided by the donee in connection with the contribution, and if so, what the value of those goods or services were. See Treas. Reg. § 1.170A-13(f)(2).
Under IRS regulations, substantiation requirements for gifts of property other than money vary depending on the amount of the deduction claimed. The regulations set up three main tiers of deductions, for amounts up to and including $500, greater than $500 but less than or equal to $5,000, and greater than $5,000, and require greater substantiation for each tier. See Treas. Reg. § 1.170A-13. For purposes of determining the applicable threshold values, property and all similar items of property donated to one or more donees during the year are treated as one property. See IRC § 170(f)(11)(F). See also Kunkel v. Comm’r, T.C. Memo 2015-71, and Bass v. Comm’r, T.C. Memo 2023-41.
“Similar items of property” is defined as “property of the same generic category or type, such as . . . clothing, jewelry, furniture, electronic equipment, household appliances, toys, . . . [or] everyday kitchenware . . . .” See Treas. Reg. § 1.170A-13(c)(7)(iii). For example, if a taxpayer made three separate donations of furniture valued at $2,000 each, the rules applicable to donations greater than $5,000 would apply because the total value of furniture donated during the year exceeded $5,000. In this case, based on the information provided by the Taxpayers, the contributions were separated into categories for clothing, household items, furniture, office equipment, toys, tools, jewelry, books, and outdoor equipment.
In addition, if a taxpayer fails to meet the substantiation requirement for a particular threshold, no deduction is allowed. The deduction is not reduced to a lower threshold for which the taxpayer may have sufficient documentation. See, e.g., Mohamed v. Comm'r, T.C. Memo 2012-152. For example, if the taxpayer in the previous example did not have an appraisal to support the furniture deduction, the entire deduction would be disallowed. It would not be reduced to the lower tier threshold of $5,000 or $500 even if the taxpayer was able to meet the substantiation requirements of the lower deduction tiers.
Gifts of Property Valued at $500 and Under
Under Treas. Reg. § 1.170A-13(b)(1), for items valued below $500, a taxpayer need only have a receipt from the donee containing the name and address of the donee, the date and place of the contribution, and a reasonably detailed description of the property donated.
For the 2022 taxable year, the Taxpayers’ contributions of household items and books were valued at $500 and under. For these contributions, the Taxpayers submitted documentation consisting of receipts, dates of the contribution, and descriptions of the property. These receipts appear to have been provided to the Taxpayers at the same time as the contributions, and they indicate that no goods or services were provided by the donee in connection with the contributions. Accordingly, the Department will treat these receipts as acceptable substantiation for those categories of property indicated above that were valued at $500 and under.
Gifts of Property Valued Over $500
Treas. Reg. § 1.170A-13(b)(3) provides that, in addition to the receipt required by Treas. Reg. § 1.170A-13(b)(1), the donation of noncash property with a value between $500 and $5,000 necessitates a written record of the manner and approximate date of acquisition and the cost basis. In addition, taxpayers must complete and attach one or more federal Forms 8283, Noncash Charitable Contributions, to their federal income tax return for each taxable year in which they make a noncash charitable contribution in excess of $500.
For the 2020 taxable year, the Taxpayers’ donations of toys, household items, and tools required this level of substantiation. In addition, the Taxpayers’ donations of jewelry and toys during the 2022 taxable year required this level of substantiation. The donations for 2020 and two of the toy donations for 2022 did not meet the substantiation requirements because no receipts were provided. Receipts are the minimum requirement for any noncash contribution regardless of the substantiation tier. As such, the deductions for those donations were properly denied. The Taxpayers submitted contemporaneous receipts including the date of contribution, a description of the items, and the required donee statement for two of the toy donations and the jewelry donation during the 2022 taxable year. Those donations were also reported on Form 8283. Accordingly, the Department will treat such donations as properly substantiated.
Gifts of Property Valued Over $5,000
Under Treas. Reg. § 1.170A-13(c)(2), if a taxpayer claims a deduction for property valued in excess of $5,000, the taxpayer generally must obtain a qualified appraisal and attach an appraisal summary to their return. The qualified appraisal must be received by the taxpayer before the due date (including extensions) of the return on which a deduction is first claimed. See Treas. Reg. § 1.170A-13(c)(3)(iv)(B).
For each of the taxable years at issue, the Taxpayers’ contributions of clothing and furniture were valued over $5,000. In addition, the Taxpayers’ contributions of office equipment in 2020, and toys and household items in 2021, were valued over $5,000. However, the Taxpayers did not submit any qualified appraisals or appraisal summaries with their returns. In addition, while itemized listings were provided, many entries were generic in nature and were not sufficiently detailed to support the claimed valuations. Further, no receipts were provided for the 2020 taxable year. Receipts were provided for only half of the donations claimed for the 2021 and 2022 taxable years. Accordingly, the deductions claimed for contributions of these items of property were properly denied.
CONCLUSION
Taxpayers must maintain records sufficient to allow the IRS to determine their correct tax liability. See Treas. Reg. § 1.6001-1(a). Similarly, Virginia Code § 58.1-310 provides:
Whenever in the opinion of the Department it is necessary to examine the federal income returns or any copy thereof of any individual, estate, trust, partnership or corporation in order properly to audit such returns, the Department or the commissioner of the revenue shall have the right to require such taxpayer to provide such return or a copy thereof and all statements, inventories, and schedules in support thereof.
Under the provisions of Virginia Code § 58.1-205, in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the burden of proof is on the Taxpayers to show that the assessment was erroneous. In this case, with the exception of certain deductions claimed in 2022, the Taxpayers did not provide sufficient substantiation to support the deductions claimed for noncash charitable contributions. In addition, as discussed above, the Taxpayers’ alternative request for reduced deductions cannot be granted because deductions that are not substantiated based on the requirements of the applicable threshold are denied in full, not reduced to the threshold for which there was adequate substantiation.
The assessment for the 2022 taxable year will be adjusted to allow the substantiated deductions in accordance with the attached schedule. There is no basis, however, to adjust the Department’s assessments for the 2020 and 2021 taxable years. The Taxpayers will receive updated bills that will include accrued interest to date. The Taxpayers should remit the balances due within 30 days of the bill dates to avoid the accrual of additional interest and possible collection actions.
The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/4974.X